You are asking the right questions!
Payback, sometimes referred to as “simple payback”, is the time in years that it takes to earn back the money you invested into your solar array. Being green is one thing (and a good thing!), but you would still like to earn back your investment before the contract runs out, thank you very much! The return-on-investment (ROI) puts a number on your profit, as an annual percentage. The ROI is very much like the APY number banks use to tell you what return to expect on your money. Both are good measures, if used properly, and both depend on how much you pay for the array.
Let us use a real-world example; a 10 kW roof-mounted PV array that you install yourself (with some help from an electrician) will set you back $21,500.
From the above numbers, you can expect this PV array to generate $3,455 per year in income, and $69,090 over its 20-year contract time.
The simple payback time for this array is therefore 21,500 / 3,455 = 6.2 years.
After this time your solar array is fully paid back by the income from your MicroFIT contract. For the remainder of the 20-year contract period you are making a profit!
For the ROI you need to know how much you will have left over after the 20-year contract period has ended, and this is your income minus the cost, or 69,090 – 21,500 = $47,590 in profit over 20 years.
Now that we know profit, it is easy to calculate the ROI as the percentage of profit in comparison to your investment (the cost) per year. The ROI is (47,590 / 20) / 21,500 = 11.1% annually. That is a much better than what the bank will pay you for your money at the time this was written (with interest rates on savings accounts at around 0.5%)!
Be aware that many PV installers conveniently ‘forget’ about the money you invested and only look at the income to calculate payback time and profit. This is wrong, misleading, and results in ROI numbers that are not realistic. Do not fall for that trick!
Another popular scam that is heavily promoted by PV installers is to calculate ROI numbers when financing of the solar array is involved. Unfortunately the whole return-on-investment concept does not work so well for financed projects, as it is easy to get double digit, triple digit, or even infinite ROI numbers that way. Imagine putting in 1 cent of your own money and financing the other $31,994.99 of the solar array. Most of the revenue will go to the bank, but at the end of the 20-year contract you may still walk away with, say, $1,000 in profit. That would make for a whopping ROI of (1,000 / 20) / 0.01 = 500,000% annually (“Yeah Baby”, as Austin Powers would say!!). Clearly the ROI concept is falling apart here, and is better to look at actual profit. Do not let ROI numbers mislead you!
Financing can still be a good thing, and many MicroFIT owners managed to roll the cost of installation into their mortgage, or get a home-improvement loan to finance the system. As long as you realize that some of the solar energy profit will go towards paying the bank instead of lining your pocket. You do end up with a fully paid for (and in a real sense ‘free’) solar array at the end of the ride, that may be put to productive use to lower your hydro bill after the 20-year contract time is up. You also contribute by producing green energy. Nothing wrong with that!